Knowledge that Transforms

Abstract This paper examines whether the sensitivity of local government credit ratings to external signals about the local economy varies with the quality of the governments' financial reports. We find the credit ratings of local governments that are required to comply with GAAP are less sensitive to changes in local home values than similarly affected governments that are not required to comply with GAAP. Further, we show that GAAP's moderating role increased after Governmental Accounting Standards Board (GASB) 34 substantially improved the quality of GAAP‐compliant governments' financial reports, which helps to attribute the main findings to reporting quality. To understand the mechanism, we study positive and negative economic signals separately. The results are pronounced when the change in home values is negative, consistent with reporting quality decreasing the rating agency's uncertainty about local governments' preexisting likelihood of default. We conclude that credit rating agencies are less sensitive to local economic signals when the local government's financial reports are of higher quality.

Abstract Public firms that go private are no longer subject to SEC financial reporting requirements. This study examines peer firms' disclosure responses following the lost information spillover from going‐private events. We first support the lost information transfer, finding evidence that analyst forecasts of peers' earnings are less accurate and more disperse and that peer liquidity is lower immediately following going‐private transactions. In response, industry peers increase disclosure quality in mandatory filings. Peers that enhance disclosure regain some of the lost informational benefits. The disclosure response is most evident in firms that rely more on intra‐industry information spillover, firms with lower competitive concerns, and firms with the greatest deteriorations in their information environments after going‐private activity. Our study examines an underexplored aspect of going‐private transactions—the loss of public disclosure—and finds that the lost information imposes a negative externality that prompts peers to increase self‐disclosure to regain informational benefits.

Abstract Using a qualitative research design and drawing on an identity work perspective, we explore how LGBTQI+ professional accountants relate their self‐identity to their professional occupation and manage their stigmatized identity at work. Sharing original empirical data from focus groups and semi‐structured interviews with LGBTQI+ professional accountants, we show how they engage in inward‐facing identity work by resisting stigmatizing pressures by conceiving of a self that is both outside the norm (“deviant”) and adapted to it (i.e., a deviant‐adapted self). However, we also find that stigmatized identities can be embraced by participants as legitimate sources of distinct professional dispositions and a more powerful work ethic. This finding offers a less confrontational view of how marginalized identities and sexuality intersect with the accounting profession. In outward‐facing processes of identity work, we show considerable variations in how and when participants communicate about their stigmatized identity. Finally, we highlight the collective dynamic of stigma management as a fundamental condition of possibility for targets to overcome the limits of atomized individual action. However, this collective dynamic entails the risk of all targets being absorbed into a collective representation and social‐identity that either makes them invisible, or directly opposes certain aspects of their self‐identity. In this respect, we show how some of our participants actively contribute to the creation of a collective social‐identity to combat stigmatization within firms, which in turn generates symbolic power differentials and symbolic violence within LGBTQI+ professional accountants.

Abstract This paper examines the role of patent texts in the stock market valuation of patents. Utilizing the large language model BERT (Bidirectional Encoder Representations from Transformers) to summarize contextual information within patent texts, I find that patent texts explain 31.5% of the variation in the stock market valuation of patents and provide large incremental explanatory power beyond other structured patent characteristics, firm characteristics, and technological trends. Additionally, patent texts significantly predict the level, volatility, and cumulation speed of future earnings, suggesting they contain genuine information about firms' performance. However, investors do not fully incorporate such information within patent texts into stock prices, as evidenced by the predictive power of patent texts for future stock returns. This underreaction is diminished after the pre‐grant publication of patent applications is mandated. My findings underscore the value of patent texts as a source of information on internally developed intangibles and have implications for academics, practitioners, and regulators.

Abstract We examine whether foreign national directors (FNDs) on US corporate boards help their firms mitigate the adverse effects of economic policy uncertainty (EPU) shocks originating from the directors' home countries. Using a comprehensive data set of US manufacturing firms' international supply chain relationships from 2003 to 2019, we find that EPU spikes in supplier countries lead to significant declines in aggregate US imports as well as in buyer firms' inventory purchases, sales, and market valuation. However, firms with FNDs from the affected countries are better able to mitigate these negative impacts. Cross‐sectional analyses reveal that the beneficial role of FNDs is more pronounced in firms with limited operational slack, greater difficulty accessing information about supplier countries, and higher financial constraints. Robust to a battery of sensitivity tests, our findings underscore the importance of FNDs on corporate boards during times of increased global uncertainty, especially for firms heavily reliant on foreign suppliers, and inform the debate on board diversity and supply chain resilience amid economic policy‐driven uncertainties.

Abstract We introduce CRISK, a financial statement–based measure, to assess the systemic risk contribution of a financial firm. CRISK measures the capital shortfall of a financial firm conditional on severe distress in the entire system. Our measure complements the market‐based measure, SRISK, introduced by Acharya et al. (2012, American Economic Review , 102 (3), 59–64) and Brownlees and Engle (2017, Review of Financial Studies , 30 (1), 48–79), in identifying systemically risky financial firms. While SRISK provides a timelier assessment using real‐time stock market data, CRISK offers a more nuanced approach using accounting information and is tailored to the distinct characteristics of insurance firms and commercial banks. Our empirical analysis shows that (1) compared to CRISK, SRISK tends to overestimate capital shortfalls for insurance firms and for banks that hold a substantial portion of Federal Deposit Insurance Corporation–insured deposits while underestimating capital shortfalls for banks heavily reliant on uninsured deposits; (2) CRISK estimates of capital shortfall closely align with the actual capital injections received by financial firms during the financial crisis of 2007–2009; and (3) CRISK exhibits a significant positive correlation with short interest. Based on our findings, we recommend using SRISK as an initial screening tool to identify potential systemically risky financial firms, followed by refining the list and validating the expected capital shortfall using CRISK.

Abstract The United Kingdom mandated expanded audit reports in two waves, starting in 2013 and 2017, respectively. Prior studies of the first wave, which included large and highly regulated companies, concluded that expanded reports have limited incremental value. We focus on the second wave, which included companies listed on the Alternative Investment Market (AIM). The AIM is characterized by emerging companies that are smaller, riskier, and subject to lighter regulatory requirements and to private monitoring. We examine whether investors and other stakeholders benefit from expanded reports in this setting. We document that AIM companies have shorter expanded reports and fewer key audit matters. Next, we demonstrate that these reports have negligible incremental information value for investors or consequences for the quality and cost of audits. Finally, although we find that some variations in the expanded reports' content are associated with investor reactions to the annual report and with audit fees, variations in external monitoring and company size do not play an incremental role. By focusing on a set of companies with weaker information environments, our findings help to extend the conclusions from prior studies about the limited incremental value of expanded reports.

Abstract When evaluating the potential financial effects of climate change, investors demand disclosures of the climate‐related risks and opportunities that companies need to manage. We examine how and why management control over climate change performance affects investors' evaluations of such disclosures. In a series of experiments, we find that investors believe that managerial optimism is beneficial and, thus, are more willing to invest when climate‐related disclosures focus on opportunities rather than risks. This effect, however, occurs only when management has high control over the company's future climate change performance. When that control is low, investors believe that managerial realism is beneficial and, thus, are more willing to invest when these disclosures focus on risks rather than opportunities. Our study has implications for companies and standard setters considering the consequences of focusing on either risks or opportunities in climate change reporting and the conditions under which one focus or the other may be beneficial.

Abstract Our study reveals that financial analysts issue more pessimistic forecasts for their investment banking clients' competitors than for unrelated firms. Our evidence is consistent with this behavior stemming from analysts' strategic incentives rather than their true beliefs. We find that analysts' pessimism for the client's competitors is more pronounced when the client is more important to analysts' brokerage houses, when high uncertainty prevents competitors from detecting analysts' strategic motives, and when analysts' brokerage houses are less prestigious. Additionally, we explore the economic consequences of the pessimism from the perspectives of the covered firms, brokerage houses, and financial analysts. Finally, we consider the impact of the 2003 Global Analyst Research Settlement. Overall, our results demonstrate that issuing pessimistic forecasts for clients' competitors is an understudied channel through which analysts curry favor with their investment banking clients.

Abstract The provision of more frequent feedback to employees is increasing, although prior research has found mixed results as to the effect of increased feedback frequency on employee performance. Narcissism research identifies narcissistic oversensitivity as a key narcissistic subdimension that may result in particularly strong responses to performance feedback. We predict and find in an experiment that increased performance feedback frequency has a more negative impact on the performance accuracy of individuals with higher levels of narcissistic oversensitivity and that this negative interactive effect of feedback frequency and narcissistic oversensitivity is mitigated by the priming of a growth mindset. These results should be of practical interest to firms as they design their management control systems to improve employee performance, considering the variation in narcissistic oversensitivity among their employees. These results also contribute to recent accounting research on the effects of feedback frequency and employee mindsets.